After enduring a couple of challenging months, investors experienced a significant shift for the better in November.
- Equities Rally: Equities saw an impressive upturn, rising 8% in local currency terms. This translated into a 6% increase for Euro investors, marking a notable recovery.
- Bond Market Surge: A sharp decline in bond yields led to robust bond returns. For instance, Euro government bonds experienced a 2.9% increase over the month.
The question arises: What fuelled this sharp turnaround in markets in November? The answer lies in a more optimistic outlook on several fronts:
- Inflation Surprises: The month kicked off with inflation figures coming in better than expected, easing some of the persistent market anxieties.
- Interest Rate Peak: This positive inflation news led the market to believe that interest rates have reached their peak, instilling confidence among investors.
- Economic Resilience: Despite the challenges of high interest rates, the resilience shown by economies in 2023, coupled with falling inflation rates, reignited hopes for a ‘soft landing’ in the US. A soft landing refers to an economic state where an economy slows down just enough to avoid recession, allowing for a more stable environment.
- Geopolitical Factors: The ongoing Hamas-Israel conflict, while concerning, appears likely to remain localised, with limited impact on broader market dynamics.
As we approach the end of the year, it seems that the pervasive pessimism about 2023 might have been overblown. However, it’s important to remember that market sentiment often swings dramatically. The current concern is that this newfound optimism could lead to unrealistic expectations for 2024. We advise our clients to remain cautious, especially when building long-term positions, as market volatility is likely to continue.
Month and YTD Market Numbers
Reflections on 2023
As 2023 draws to a close, it’s an opportune moment to look back and assess the year’s pivotal developments. Here’s how I’d summarise the year, with just over three weeks remaining:
- There was significant progress in reducing inflation, from 9.2% down to 2.4% (in the Euro area).
- Interest rates saw a sharp increase, with the Euro policy rate rising by 2%, but this increase appears to have reached its peak.
- Globally, economic growth continued to decelerate. The US economy displayed unexpected resilience, the Eurozone’s economy began to plateau, and China, after an initial post-Covid surge, showed weakness.
- Equity markets, though volatile, ultimately delivered strong returns, driven by the ‘magnificent seven’ and despite a regional banking crisis in the US during spring.
- AI emerged as a key factor boosting the ‘magnificent seven’, signalling the start of a new era in productivity enhancement.
- The bond market, while experiencing volatility, ultimately yielded positive returns.
- In the geopolitical arena, the Ukraine conflict saw some initial progress for Ukraine but has since evolved into a stalemate, with global attention seemingly waning. The Hamas-Israel conflict added to geopolitical risks and while early days yet, has so far remained localised without tiggering significant broader international involvement.
Inflation Falling Faster than Expected
In a significant development for the EU economy, there was positive news on the inflation front with headline inflation falling to 2.4% in November. Core inflation also showed a decrease, reaching 3.6%. This faster than expected decline in both headline and core inflation has been a key driver behind the recent surge in market optimism.
Central Banks At Peak Policy Rates and Attention Turns to Cuts in 2024
Recent weeks have seen a growing conviction in the market that Central Banks have reached the zenith of their interest rate hikes and we expect policy rates will remain unchanged in the upcoming Central Bank meetings in December. Markets are adjusting their forecasts to anticipate possible earlier-than-expected interest rate cuts in 2024. Despite these market sentiments, it’s probable that Central Bankers will continue to express caution, maintaining a hawkish outlook on inflation and potentially challenging the market’s current optimism.
Higher Rates Means Better Cash Returns Available
As a result of the higher interest rates investors can now access better cash returns via regulated Money Market Funds, which target a return in line with the Euro Short-Term rate, which is now at 3.9%.
Higher Rates are Also a Challenge for Governments with Higher Borrowings
Global debt is projected to hit €97 trillion this year, a 40% increase since 2019 according to projections from the International Monetary Fund (IMF). The higher cost of servicing debt will become a real issue for governments – perhaps another incentive to lower interest rates sooner rather than later.
Source: Visual Capitalist
Equity Market Performance 1.1.22 to 5.12.23
The strong recovery of equity markets in November means that the global equity market has now recovered the losses of 2022.
Our Investment Outlook
Despite the positive November experience, we remain cautious in our outlook. This caution stems from:
- Ongoing geopolitical risks.
- A view that higher rates will ultimately hurt businesses and consumers.
- Divergent indicators that present a mixed economic picture, but with projections still pointing to a further slowdown in 2024.
- We note the improved inflation numbers but that there is still more to do.
Geopolitical risks are significant with bad outcomes not appearing to be priced into markets. The core assumption of markets remains that the Ukraine war will not end, or escalate significantly, any time soon, and that the situation in the Middle East will remain localised.
Overall, despite the progress on inflation, markets are likely to remain volatile until there is more certainty around (a) geopolitical risks, (b) financial stability (c) core inflation falling back to the target of 2% and (d) the depth and length of economic slowdowns / recessions.
For short-term investors, this is not a market to be in but for our clients who are long-term investors, we continue to advise them to follow their plan and use market weakness to build on positions.
Christmas Greetings and Best Wishes for 2024
As this is the final Markets in 1 Minute for this year may I take this opportunity to wish you and your family a very happy Christmas and best wishes for 2024.
John Tuohy is Chief Executive of Acuvest, an Irish-owned, independent advisory firm specialising in wealth management, pensions, and investment advisory services for individuals, companies, pension schemes, charities, and institutions. John is a Chartered Financial Analyst (CFA) and a Fellow of the Chartered Association of Certified Accountants.